Economic Observer

Overview: Over the past week, the main influences on mortgage rates were an escalation in tensions with North Korea and additional details about a proposed tax reform plan. These had offsetting effects, and mortgage rates ended with little change.

The rhetoric between the U.S. and North Korea shifted to a higher gear over the past week. On Friday, North Korea threatened to detonate a hydrogen bomb over the Pacific. Then on Monday, North Korean officials said that they interpreted President Trump's weekend comments as a declaration of war. Investors responded to both events by shifting from riskier assets such as stocks to relatively safer assets, including U.S. mortgage-backed securities (MBS). The added demand for MBS caused mortgage rates to decline.

However, the improvement was reversed on Wednesday when President Trump released additional details about a proposed tax plan. If this plan or a similar one is passed, it is expected to boost economic growth and raise the outlook for future inflation. Since higher inflation is negative for mortgage rates, rates moved higher. In addition, the budget deficit is expected to increase under the tax plan. This potential increase in the supply of bonds was also bad for mortgage rates.

In August, sales of newly constructed homes unexpectedly dropped from July to the lowest level since December 2016. According to the Commerce Department, though, the data in Texas and Florida may have been affected by the recent hurricanes. On a more positive note, the inventory of new homes for sale rose to a 6.1-month supply, which was the highest level since July 2014.

Week Ahead

Looking ahead, the core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, will be released on Friday. The Institute for Supply Management (ISM) Manufacturing Index will come out on October 2, followed by the ISM Services Index on October 4. The next Employment Report will be released on October 6. Note that any changes in the relationship with North Korea could influence mortgage rates.